“Mathematics is not just a ‘numbers game’, it is a way of thinking.”
To follow on from yesterday’s posting on Taleb’s book ‘Fooled by Randomness’, one of the proposals he puts forward is that humans are just not very well equipped to deal with the concept of randomness and the intricacies of probability. Probability has many counterintuitive dynamics that daily living just doesn’t instil an adequate understanding of. Taleb looks a lot not just at the maths of randomness, but also the biology and psychology of it. Particularly how humans are ‘wired’ to deal with it. As a result, these tendencies would skew the appropriate balance of Management and Leadership in an organisation by over-valuing Leadership (which in many cases is really randomness is disguise) and under-valuing Management (which takes more sophistication than meets the eye).
He notes the effect of ‘serotonin’ which enters our bloodstream on the high of achieving a success:
“Their [Leader-types] strings of success will inject them with so much serotonin (or some similar substance) that they will even fool themselves about their ability to outperform markets (our hormonal system does not know whether our successes depend on randomness…Likewise, an increase in personal performance (regardless of whether it is caused deterministically or by the agency of Lady Fortuna) induces a rise of serotonin in the subject, itself causing an increase of what is commonly called ‘leadership’ ability.”
Taleb alludes to the ‘external kick from randomness’ which further amplifies this effect. He is referring to B.F. Skinner’s famous pigeon experiments on operant conditioning in which it was determined that the most ‘powerful’ or ‘addictive’ conditioning was that where the reward cycle was random. In other words, if the pigeon never could figure out if a stimulus would produce a pellet reward, it would just keep pecking furiously regardless of the stimulus pattern in the hopes that it just might produced the desired response (hmm…does this sound like some business strategies?).
In short, he calls people “probability blind”. While most people understand the basic concepts of mean, median and average (which most simply lump into a synonymic equivalence despite the subtle semantic differences), he notes that people regularly fail to understand and account for such concepts as confidence intervals (ie. volatility, think about trying to pack for a trip where the temperature ranges from freezing to sweltering on any given day), and path dependence of beliefs (eg. the tendency for people to continue to own an expensive painting that has appreciated in value while they would never think of paying the same amount if they had to purchase it outright).
“Remember that nobody accepts randomness in his own success, only his failure…We need to take into account the costs of mistakes; in my opinion mistaking [skill] for [randomness] is not as costly as an error in the opposite direction.”
He is saying that that Management skills of understanding and mitigating downside risks to an enterprise are often undervalued and as a result under-represented. Better to err on being humble and assume that chance events contributed even if they did not, than to be arrogant and assume that actions produced results that they didn’t. As I said yesterday, Taleb is unabashedly the soap box spokesman for the side of the ‘Manager’ persona in the risk-profile perspective of business leadership.